Ali’s blog

Mostly quant stuff with occasional digressions

Standard of living: US versus Europe

Posted by alifinmath on February 6, 2008

I’m contemplating moving back to Europe (it’ll take some time to organise, though). My motives are primarily cultural and social rather than economic. But when I look at North European prices, I hesitate. $12 for a pint of beer. $30 for the short train trip from Gatwick to Central London. A gallon of petrol for $10. No decent accommodation available in London, Paris, and Oslo for under $1,000,000 (my mother’s tiny terraced house in West London is now priced at over $600,000). I recently read in a British newspaper that for the first time in 125 years, per capita UK income is greater than per capita US income (at current exchange rates, that is). But this is a meaningless comparison: the US standard of living is head and shoulders above the UK’s. And probably above most of continental Europe. This is from a 2004 piece in the Wall Street Journal:


The study, “The EU vs. USA,” was done by a pair of economists–Fredrik Bergstrom and Robert Gidehag–for the Swedish think tank Timbro. It found that if Europe were part of the U.S., only tiny Luxembourg could rival the richest of the 50 American states in gross domestic product per capita. Most European countries would rank below the U.S. average, as the chart below shows.

But a rising tide still lifts all boats, and U.S. GDP per capita was a whopping 32% higher than the EU average in 2000, and the gap hasn’t closed since. It is so wide that if the U.S. economy had frozen in place at 2000 levels while Europe grew, the Continent would still require years to catch up. Ireland, which has lower tax burdens and fewer regulations than the rest of the EU, would be the first but only by 2005. Switzerland, not a member of the EU, and Britain would get there by 2010. But Germany and Spain would need until 2015, while Italy, Sweden and Portugal would have to wait until 2022.

Higher GDP per capita allows the average American to spend about $9,700 more on consumption every year than the average European. So Yanks have by far more cars, TVs, computers and other modern goods. “Most Americans have a standard of living which the majority of Europeans will never come anywhere near,” the Swedish study says.


Now much of this doesn’t hold anymore, primarily because of the dollar’s demise. But US average living standards are still superior. The WSJ crowing some more:


Higher GDP per capita allows the average American to spend about $9,700 more on consumption every year than the average European. So Yanks have by far more cars, TVs, computers and other modern goods. “Most Americans have a standard of living which the majority of Europeans will never come anywhere near,” the Swedish study says.


There is some truth to this, but the picture is a bit more complex than the WSJ’s braying would have us believe. If one is an affluent American, one is using the services of a growing number of working American poor and consuming products made in the sweatshops of the Orient: that’s where a big chunk of the vaunted “standard of living” is coming from. Furthermore, it’s based on borrowed time and money. But let’s look at more of the WSJ article:


But what about equality? Well, the percentage of Americans living below the poverty line has dropped to 12% from 22% since 1959. In 1999, 25% of American households were considered “low income,” meaning they had an annual income of less than $25,000. If Sweden–the very model of a modern welfare state–were judged by the same standard, about 40% of its households would be considered low-income.

In other words poverty is relative, and in the U.S. a large 45.9% of the “poor” own their homes, 72.8% have a car and almost 77% have air conditioning, which remains a luxury in most of Western Europe. The average living space for poor American households is 1,200 square feet. In Europe, the average space for all households, not just the poor, is 1,000 square feet.

So what is Europe’s problem? “The expansion of the public sector into overripe welfare states in large parts of Europe is and remains the best guess as to why our continent cannot measure up to our neighbor in the west,” the authors write. In 1999, average EU tax revenues were more than 40% of GDP, and in some countries above 50%, compared with less than 30% for most of the U.S.


And here the WSJ reveals its true colors as a conduit for right-wing garbage. People in the US need cars regardless of whether they can really afford them: mass transit is often lacking, and distances are just so much greater. As for house ownership, the less said at this moment, the better. The “poverty line” as defined by the US government has become totally risible over the decades; here’s an interpretation at variance with the head-in-the-sand, best-of-all-possible-worlds outlook of the WSJ:


Academic experts also say the government’s figures minimize the true scale of poverty because they are outdated. The formula for the poverty level was set in 1963 on the assumption that one third of the average family’s budget was spent on food.

This is no longer true. Housing has become the largest single expense and tens of thousands of the “working poor,” the label for those who work at or near the minimum wage, are forced to sleep in cars, trailers, long-term motels or shelters.


“Every August, we Americans tell ourselves a lie,” said David Brady, a Duke University professor who studies poverty.

“The poverty rate was designed to undercount because the government wanted to show progress in the war on poverty.

“Taking everything into account, the real rate is around 18 percent, or 48 million people. Poverty in the United States is more widespread, by far, than in any other industrialized country.”

Poverty is a universal problem, as is inequality. The world’s 500 richest people, according to U.N. statistics, have as much income as the world’s poorest 416 million.

The post-hurricane poverty scenes were so remarkable for most of the world because of the perception of the United States as the rich land of unlimited opportunity.

No other country spends so much money — billions of dollars — to keep job-hungry foreigners out; no other country has an annual lottery in which millions of people play for 50,000 permanent resident “green cards,” no other country has as many legal and illegal immigrants, all drawn by dreams of prosperity.

For many Americans they remain just that: dreams. While there are arguments over how poverty is measured — conservatives say the census overstates it because it does not take into account food stamps and other subsidies — there is consensus on one thing.

The minimum wage, which rose by 15 cents to $6.35 an hour on October 1, is not enough to keep you above the poverty line. Yet minimum wage jobs, without health insurance or vacations, are the only jobs available to millions of people with only basic education.

The well-paid unskilled jobs in heavy industry which once lifted working-class Americans into the middle class are largely gone and the decline continues. Since 2001, the United States has lost more than 2.7 million manufacturing jobs. Low-paid clerical work is being outsourced to developing countries.


Here is an article in The Nation. I think it’s worth reading in its entirety, but I want to focus only on the following:

There is a reigning American mythology that blunts any concern: that holding a low-wage job is a temporary situation, that mobility and education and time will solve whatever problem exists.

The evidence, however, contradicts this myth. Most low-wage workers will never move up the ladder into the middle class. Economics professors Peter Gottschalk of Boston College and Sheldon Danziger of the University of Michigan found that about half of those whose family income ranked in the bottom 20 percent in 1968 were still in the same group in 1991. Of those who had moved up, nearly three-fourths remained below the median income. The US economy provides less mobility for low-wage earners, according to an Organization for Economic Cooperation and Development study, than the economies of France, Italy, Britain, Germany, Denmark, Finland and Sweden.


And I can’t resist the following from the same article:


These forms of poverty persist, and the country is still arguing about what to do with its welfare recipients. But the great secret of America is that a vast impoverished population has grown up in our midst. These are not Americans who have been excluded from the world of work; in fact, they make up the core of much of the new economy. And it is estimated that low-wage jobs will make up 30 percent of the economy by the end of this decade.

Thirty million Americans make less than $8.70 an hour, the official US poverty level for a family of four. (Most experts estimate that it takes at least double this level for a family to provide for its basic needs.) Their low-wage, no-benefits jobs translate into billions of dollars in profits, executive pay, high stock prices and low store prices.

Inadequate wages are only part of the problem. Most of these workers lack basic job benefits. In 1995 less than half of workers making under $20,000 a year were offered health insurance by their employer. Only one in five workers with incomes below $20,000 has pension coverage. For low-wage parents with children under 6, one-third do not get paid vacations or paid holidays. And most low-wage jobs fail to provide sick pay or disability pay. These jobs leave little flexibility to care for a sick child or deal with an emergency at school–let alone the normal appointments and needs of everyday life. Quality childcare is unaffordable for most, and many nighttime shifts and employers’ schedule changes make it harder and more expensive to obtain.


So if one is on the right side of an increasingly polarised USA, the country is nirvana. Not so hot on the other side….

The following is a somewhat dated comparison of the US to other developed countries (I hesitate to call the US “developed” anymore):


The following statistics are a 1991 comparison of the United States with Northern Europe, Japan and Canada. The comparison is especially revealing because all these nations are more liberal and democratic than we are. Their voter turn-outs are 50 percent higher; their corporate lobbying systems are much less developed; their taxes are higher, their safety nets larger, their societies more equal, their labor unions stronger.


I’m tired of pasting but the piece is worth a glance.

US worker productivity may still be the highest in the world (I don’t know what the figures are), but it’s a moot point if the benefits accrue to a minority of people (certainly not the productive workers).

I suppose I should say in conclusion that if one is among the band of winners in the USA (or intends to join that group), and not too bothered about the absence of equity or real culture, then one should stay in the USA (needless to say, members of this group can afford escalating prices of education and healthcare, and to seclude themselves from the great unwashed). If justice and culture matter, one should look for other pastures.


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